Although media and people are currently close attention to the Greece default situation, one country is standing much riskier situation than the Greece. Can you guess which country? Answer ironically is my country: Japan. Japan has been standing in very dangerous territory for over 2 decades since implosion of the property bubble during 1990s. In this blog, I would like to discuss about severity of Japan's fiscal condition and what can happen next.
At first, let's take a look at Japan's current situation. According to the sources from www.chrismartenson.com, current Japan situation is following:
Japanese total debt standing is 235% of its GDP.
The total shutdown of all 54 nuclear plants due to Fukushima accident.
Due to the shutdown, Japan's trade balance is now in the negative since Japan needs to import fossil fuel to make up this shortfall.
A budget deficit that is now 56% larger than the revenue.
A recession shrinks Japan's economy at 2.3% per year.
Source: Euro Pacific Capital Inc.
Japanese debt situation has been the highest among all the developed countries in the world (See chart on top). Yet, most of all those debts are owned by Japanese nationals (And Bank of Japan also known as BOJ). With Japanese high saving rate, they have been able to avoid total catastrophic event until now. However, I am afraid that this won't last for a long time.
Japan has depended upon the nuclear energy for 30% of electric consumption (Both consumers and industrial). However, due to Fukushima accident, all of 54 nuclear plants will go offline after March 26, 2012. From this time on, Japan will need to import majority of other fuel sources particularly fossil and natural gas from other countries, even if they can conserve small amount of electricity by reducing the overall usage. According to the source from Reuters, it will cost additional 3.3 trillion yen ($39 billion) for Japan to import all the fossil fuel to make up this shortfall. Moreover, according to Daiwa security, Japan's economic output will decline by 2.5% per year as a result of shutting down the nuclear power plants. Along with recent decline of the export to China and Europe, these combined events pushed Japan's trade balance to negative territory.
Currently, Japanese government and BOJ are trying to add the liquidity (Cheapening Yen) to boost their export. However, they will probably soon realize that energy cost will be more expensive due to cheapening Yen. It is almost in the dead end in my view because...
- If Japan cheapens the Yen to boost export, energy import cost will be much more expensive (30% of energy shortfall is big).
- If Japan strengthen the Yen to lower the energy cost, then, it is hard for Japan to export since Japanese export will be too expensive for the other countries.
Besides, in order to strengthen the Yen, they must increase the interest rate. Their debt load is 235% of its GDP and even increase in interest rate by about 3% before all the tax revenue will be consumed by the entire interest payment. So, Japan has very small maneuverability in terms of raising their interest rate and Japan can't even make small margin of error.
So, what Japanese government and BOJ will do next? Initially, BOJ will keep monetizing their debt. During 2012, Japan needs to roll over approximately $3 trillion worth of their debt. While small percentage of people will buy their debt, majority of their debt must be monetized by BOJ simply because no one will buy their debt. Due to nature of our financial system, they MUST constantly increase its debt to keep this game going. However, as I said, they will eventually realize that energy cost will be too expensive if they keep the policy so they will reverse the policy and start to increase their interest rate.
In my view, it is almost matter of time before reaching its climax. Japan has overcome 2 decades of recession but this one is very tough one. One of two events must happen: Either default on their own debt or keep monetizing their debt until complete destruction of its currency system as Ludwig von Mises stated. I feel that either event may come much earlier than everybody thinks. It is very difficult for national level to evade this but it is not too late for individual to prevent from this coming black swan event as I like one of the quote "Big ship going down does not mean that we must go down with them". As I am Japanese national, here is the list of what I would do to protect myself from this event:
- Run away from the paper currency (Yen) and get physical assets like gold and silver.
- Keep the money inside of the bank at MINIMUM (Only emergency fund and living expense).
- Keep enough food storage in case of the system breakdown.
- Buy inverse ETF to short Japanese government debt.
Time is fast approaching whether people notice this or not. Prepare for the worst and hope for the best. That's my advice.
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